(Source: Office of the United States Trade Representative; issued May 30, 2005)

BACKGROUND: The WTO Case Against Airbus

The U.S. case alleges that the launch aid for the A350, the A380, and earlier aircraft and other government support to Airbus qualifies as subsidies under the Agreement on Subsidies and Countervailing Measures (SCM) and that the subsidies are "actionable" because they cause "adverse effects," or "prohibited" because they are export-contingent, or both.

The first step in the WTO process is to file a request for consultations. The United States took that step on October 6, 2004. The United States and the EU held WTO consultations on November 4, 2004, but the consultations failed to resolve the dispute. On Tuesday, the United States will take the next step by requesting the formation of a WTO dispute settlement panel.

Subsidies to Airbus

Airbus S.A.S. ("Airbus") was established in 1970 as a European consortium of French, German, and later, Spanish and U.K. companies. In 2001, Airbus formally became a single integrated company. The European Aeronautic Defence and Space Company ("EADS") and BAE SYSTEMS of the U.K. transferred all of their Airbus-related assets to the newly incorporated company and became 80 percent and 20 percent, respectively, owners of the company. The operating results of Airbus are fully consolidated in the EADS balance sheet.

Over its 35 year history, Airbus has benefited from massive amounts of EU member state and EU subsidies that have enabled the company to create a full product line of aircraft and gain a 50 percent share of LCA sales and a 60 percent share of the global order book. Every major Airbus aircraft model was financed, in whole or in part, with EU government subsidies taking the form of "launch aid" - financing with no or low rates of interest, and repayment tied to sales of the aircraft. If the sales of a particular model are less than expected, Airbus does not have to repay the remainder of the financing. EU governments have forgiven Airbus debt; provided equity infusions; provided dedicated infrastructure support; and provided substantial amounts of research and development funds for civil aircraft projects.

Since 1985, the United States has been involved in several major rounds of negotiations with the Airbus partner governments and the Commission with the objective of achieving greater disciplines over the subsidies provided to Airbus.

In July 1992 the two sides negotiated a bilateral agreement limiting government support for LCA programs. The agreement included a prohibition of future production support and a limitation on the share of government support for the development of new aircraft programs to 33 percent of the project's total development costs.

Although the United States expected the 1992 agreement to lead to a progressive reduction of subsidies, it became instead an excuse for EU governments to continue subsidizing Airbus. The $3.7 billion in launch aid that EU governments committed for the new Airbus A380 was the largest amount of funds committed for a single project. The EU provided further loans and infrastructure that has pushed the total amount of A380 subsidies to approximately $6.5 billion. Airbus is now preparing to launch another competitor (A350) to the recently-launched Boeing 787, and it has requested $1.7 billion for that aircraft as well, even though it has stated publicly that it could easily finance the project itself.

In 1995, the WTO Subsidies Agreement entered into force. The agreement applies in full to subsidies for LCA. Therefore, if a Member provides a subsidy that is inconsistent with the agreement's terms, it is subject to challenge at the WTO.

In 1997, the EC conditioned approval of the merger of Boeing and McDonnell Douglas on a commitment by Boeing to license to Airbus any "government-funded patent" that could be used in the manufacture or sale of LCA. Airbus has no similar commitment to share the fruits of government-funded technology with Boeing. The United States has sought to include a mutual commitment of this kind in a new bilateral agreement.

Efforts to Negotiate a New Bilateral Agreement

The Administration's current effort to end the subsidization of Airbus began early last year, when it became apparent that EU Member States were considering subsidies for the A350. U.S. and EU officials had extensive conversations in the late spring and early summer, and two sets of meetings in July and then again in September, as the United States sought an EU agreement to negotiate an end to subsidies. President Bush instructed USTR to pursue all options to end the subsidization of Airbus, including the filing of a WTO case, if need be. The U.S. industry fully supported this approach.

Unfortunately, the EU was not willing to agree to the goal of ending new subsidies, much less on how to achieve this goal. Therefore, on October 6, 2004, the United States initiated the first stage of dispute settlement proceedings at the WTO by requesting consultations with the EU. The EU responded by requesting consultations on alleged U.S. subsidies to Boeing. The United States also exercised its right to terminate the 1992 Agreement at that time.

The United States held WTO consultations with the EU in November, but did not resolve its concerns. Then, on January 11, 2005, when the United States was on the verge of requesting the formation of a dispute settlement panel, the two sides reached agreement on a framework for negotiating an end to subsidies. The framework included a 90-day time frame for the negotiations. It also included a common goal of ending subsidies, as defined by the WTO Subsidies Agreement. The agreement applied equally to the United States and the EU.

In March of this year, the EU introduced a new set of conditions for the negotiations and turned away from the agreed objective of ending subsidies. They began to focus instead on merely "reducing" subsidies, with the possibility of eliminating them at some point in the future. The EU appears to have changed its position because certain EU Member States want to continue providing launch aid subsidies to Airbus, in particular for the Airbus A350.

Earlier this month, Airbus confirmed that it has applied to all four governments for A350 launch aid, and that it is seeking a decision by mid-June. According to the British press, "Whitehall insiders" have stated that the U.K. government will announce a $700 million commitment of launch aid at the Paris Air Show, which will be held June 9-13. Officials of the European Commission have stated that launch aid is permissible, in their view, and that it is up to the Member States to decide whether to provide it. On May 24, a French government official stated that "[t]he French state has given its financial support to the A380 programme and we expect to continue in this vein . . . ."

While the United States remains committed to resolving this matter through the negotiation of a new bilateral agreement, we have concluded that filing a WTO panel request at this time is necessary to ensure that, one way or another, the playing field is leveled. The WTO offers an agreed multilateral forum for resolving trade disputes according to agreed rules.